Medical Facilities Corp
TSX:DR
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Earnings Call Analysis
Q4-2023 Analysis
Medical Facilities Corp
The company concluded the year with a strong fourth quarter. Surgical volumes rose by 4.9%, excluding divested centers, which pivoted facility service revenue upwards by 7.8%. The income from operations soared by 144% resulting in $25.6 million and adjusted EBITDA ramped up by 97.3%, reaching $30.5 million. These indicators hint at robust operational management and an effective strategy which fed into the profitability surge.
The company demonstrated a healthy cash flow by paying down $20 million of its corporate credit debt throughout the year and repurchasing around 1.19 million common shares for $7.4 million, which tells a story of disciplined capital management and shareholder value focus. Moreover, the repurchase activity suggests confidence in the intrinsic value of the company's stock.
Operational excellence was underscored as the company's surgical hospitals were recognized for their superior quality of care, receiving accolades from CareChex and Press Ganey. This kind of recognition not only boosts the brand but potentially drives higher patient volumes due to the enhanced reputation.
Total revenue grew by 19.9% to $122.3 million for the quarter, with much of the increase attributed to the reduced reliance on government stimulus income from the previous year. This self-sustaining growth, propelled by higher proportions of orthopedic and spine cases, is a testament to the company's resilient business model throughout the economic cycles.
Operating expenses were down by 10.6% from the same period of the prior year, reflecting effective cost management. The lowering to 79% of total revenue in operating expenses, from 105.9% in the previous year's quarter, alongside income growth, indicates the company's substantial margin improvement.
The company ended the year with $19.8 million in net working capital and $24.1 million in cash equivalents. The balance sheet was further strengthened as net debt to equity decreased to 0.78x from 0.94x at the end of the previous year, giving the company ample room for future growth initiatives or to weather potential economic downturns.
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Good morning, everyone. Welcome to Medical Facilities Corporation's 2023 Fourth Quarter Earnings Call. [Operator Instructions] Before turning the call over to management, listeners are reminded that today's call may contain forward-looking statements within the meaning of the safe harbor provisions of the Canadian provincial services laws.
Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements, and actual results may differ materially from those expressed or implied in such statements.
For additional information, please contact us -- please consult the MD&A for this quarter, the Risk Factors section of the Annual Information Form and Medical Facilities' other filings with Canadian Securities Regulators. Medical Facilities does not undertake to update any forward-looking statements. Such statements speak only as of the date made.
I would now like to turn the meeting over to Mr. Jason Redman, President and CEO of Medical Facilities. Please go ahead, Mr. Fredman.
Thank you, operator, and good morning, everyone. With me on the call is our Chief Financial Officer, David Watson. Earlier this morning, we reported our fourth quarter and year-end results. Our news release, financial statements and MD&A are available on our website and have been filed on SEDAR+. Throughout 2023, we remain disciplined, both operationally and financially. We execute our strategy to focus on our core operations, drive financial performance and unlock additional shareholder value. We completed the divestiture of the MFC Nueterra ASCs have successfully achieved overhead cost reductions. We reduced our
corporate debt and returned additional capital to shareholders through a Normal Course Issuer Bid.
The fourth quarter was a very solid finish to a strong year, higher surgical volumes helped drive revenue increases and profitability for the quarter. Excluding the divested ASCs, surgical case volumes were up 4.9%, contributing to a 7.8% increase in facility service revenue compared to the fourth quarter of the year prior. Similarly, when excluding the results from the divested ASCs as well as the prior year impairment charge relating to those ASCs. Our income from operations for the quarter was up 144% to $25.6 million, and adjusted EBITDA increased 97.3% to $30.5 million. We used our cash flow to pay down the outstanding balance on our corporate credit facility by $8 million in the quarter and $20 million for the year.
During the quarter, MSC returned an additional $2 million to shareholders to the repurchase of close to 300,000 common shares under our normal course issuer bid. For the year, we repurchased approximately 1.19 million common shares for total consideration of $7.4 million. As we look back in 2023, it is clear that our deliberate and focused approach has made MSC stronger and better positioned for 2024 and beyond.
Speaking of positioning, our surgical hospitals continue to rank among the best hospitals in the [ nation ] for high quality of care. Last month, for the second year in a row, Black Hills Surgical Hospital was named the #1 hospital in the U.S. for major orthopedic surgery in both medical excellence and patient safety categories by CareChex. Around the same time, Sioux Falls Specialty Hospital received a 2024 outpatient Orthopedic Surgery Excellence Award from Health grades and was ranked amongst the best hospitals in the U.S. for outpatient and joint replacement surgery.
And in January, Arkansas Surgical Hospital ranked in the top 5% of health care providers for patient experience over the last year, being named a Human Experience Guardian of Excellence Award winner for the fifth year in a row by Press Ganey. We are proud and thankful for the dedication and high quality of care provided by the teams at each of our facilities.
On that note, I'll turn the call over to David to review our financial results in more detail. David?
Thank you, Jason. Good morning, everyone. Before I begin, please note that all dollar amounts [ that ] follow are in U.S. dollars unless stated otherwise. Also note that the year-over-year income statement variances, I will discuss exclude the results from the divested MFC Nueterra ASCs. Starting with our income statement. Total revenue and other income for the quarter increased $20.2 million or 19.9% to $122.3 million. The increase is mostly attributable to the $12.3 million reduction in government stimulus income in the prior year quarter due to the reversal of PPP income.
Remainder of the variance was due to a 7.8% increase in Facility Service revenue in Q4 2023. The growth in Facility Service revenue was due to changes in case mix from a higher proportion of orthopedic and spine cases and a 4.9% increase in surgical case volumes. Sioux Falls moving its anesthesia service and related building in-house in 2023, also contributed $1.1 million to the increase.
Looking at our surgical cases for the quarter. Observation cases were up 28.8%, and outpatient cases increased by 4.2%, but inpatient cases were down 13.9%. Operating expenses for the quarter totaled $96.6 million, which is down $11.4 million or 10.6% from the same period in 2022. However, as you may recall, in the fourth quarter of 2022, we recorded an impairment charge of $16.5 million relating to the MFC Nueterra ASCs. Excluding the prior year impairment charge, operating expenses increased $5.1 million or 5.6%. As a percentage of total revenue and other income, operating expenses decreased to 79% from 105.9% in Q4 2022.
Consolidated salaries and benefits were up 8.3%, primarily due to annual merit increases, full-time equivalent increases and market wage pressures as well as the impact of Sioux Falls moving its anesthesia service and related billing in-house during the year. Consolidated drugs and supplies were up 1.9% in the quarter due to the higher surgical case volume. Consolidated G&A increased 11.6%. The swing was mainly due to noncontrollable corporate level costs related to share-based compensation plans resulting from the decrease in our share price in Q4 of 2022 versus Q4 2023 as well as increases in both contracted services and other facility-related expenses.
As Jason mentioned earlier, when excluding the prior year impairment charge, our income from operations was up 144% to $25.6 million, and adjusted EBITDA increased 97.3% to $30.5 million. The higher facility service revenue contributed to these increases. But again, in the prior year, we were affected by the reversal of PPP income. In the fourth quarter, we generated cash available for distribution of approximately CAD 12.8 million, up from CAD 9.9 million in Q4 of the prior year. This increase in our lower share count year-over-year, decreased our payout ratio to 15.6% for the quarter from 21.2% in Q4 2022.
On a full year basis, our payout ratio decreased to 26.7% from 33.8% in the prior year. Looking at our balance sheet, at the end of 2023, we had consolidated net working capital of $19.8 million and cash and cash equivalents of $24.1 million. For reference, at the end of 2022, our net working capital stood at $32.5 million, and we had cash and cash equivalents of $34.9 million. Among other things, the variations reflect our $20 million paydown of the corporate credit facility and share purchases of $7.4 million under the NCIB program.
At year-end, our corporate credit facility had an outstanding balance of $16 million compared with $36 million at the end of 2022. Inclusive of the lease liabilities, our net debt to equity remains low at 0.78x as compared to 0.94x at December 31, 2022.
This concludes our prepared remarks. We would now like to open up the call for questions.
[Operator Instructions] Our first question comes from the line of Sahil Dhingra who is an analyst from RBC.
This is Sahil for Doug [indiscernible]. My first question is, are you facing any impact from the Change Healthcare cybersecurity event that was reported in February?
Yes, I can take that. Sahil, So how you're doing.
Doing good.
Yes. So we're not seeing any material impact of the event that's happened with Change.
Okay. Great. Then my second question is, can you provide us an update on the competitive dynamics? And also related to this, I saw the pain cases were again down this year, down this quarter on a year-over-year basis. And it has been the case for the last couple of quarters. Can you provide us some additional color on this dynamic as well?
Yes. So I'll talk to the competitive environment, I'll let David talk to you on pain cases. We're not seeing any significant changes in the competitive environment. Our hospitals continue to perform very well. Our surgical cases are up. We're doing a good job at retaining and attracting talent. So we continually watch the environments which we operate, but we haven't seen any strong competitive threats emerge.
And Sahil, with respect to the pain cases, it certainly varies by facility. But in some cases, it's been related to the departure of a pain physician. In other cases, you've got pain doctors that are in the later stages of the career may be winding down what they're doing. So we're continually looking to replenish and recruit new pain doctors. So it's just part of the normal cycle.
Okay. Okay. And my last question is on capital deployment. So what's the latest thinking on capital deployment as we go forward? If you could comment on the split between either a dividend increase or share buybacks or further debt reduction.
As we've said previously, it's a combination of the 3. So we continually look at how we allocate that capital. We have been active in the NCIB program. So we continue to remain active, and that's our intention going forward. The Board hasn't made any decision with respect to altering the dividend. And in terms of corporate repayment of debt, that's something that's -- that we still intend to proceed with. But we constantly evaluate where to allocate the capital amongst those 3 priorities.
[Operator Instructions] There seems to be currently no further questions from the phones at this time. So I'll hand it over back to our speakers for the closing comments.
Thank you, operator, and thank you to everyone joining our call this morning. We look forward to updating you again next quarter.
Thank you. This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.